Allergan CEO promises to limit price hikes on drugs in a bid to rebuild the ‘social contract’

Seeking to deflect harsh criticism of the pharmaceutical industry, one chief executive officer — Allergan’s Brent Saunders — has taken the unusual step of promising to avoid “price gouging” and agreed to limit price hikes on brand-name medicines.

In a blog post on the company website on Tuesday, Saunders wrote that Allergan — which is probably best known for selling Botox — would not raise prices more than once a year and that any price hikes will be limited to single-digit percentage increases.

And Saunders also committed to avoiding “major” prices hikes without any corresponding increases in costs as products near patent expiration. Drug makers often raises prices as medicines are about to lose patent protection in order to extract as much revenue as possible before generic competition arrives.

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“The health care industry has had a longstanding unwritten social contract with patients, physicians, policy makers, and the public at large,” Saunders wrote. “Those who have taken aggressive or predatory price increases have violated this social contract!”

His missive comes as the national debate over the cost of prescription medicines becomes a crisis for the pharmaceutical industry.

The issue has been accelerating for some time, but has reached a feverish pitch over the past year after Valeant Pharmaceuticals and Turing Pharmaceuticals, which had been run by Martin Shkreli, bought old drugs and quickly jacked up the prices to sky-high amounts.

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Those moves followed increasingly higher prices set for new medicines to treat hepatitis C and some forms of cancers, as well as hefty increases for some generic drugs, which are traditionally seen as much lower-cost alternatives to brand-name treatments.

The outcry reached new heights last month, though, as the controversy over the EpiPen device for allergic reactions erupted. In response to outrage from many parents, a growing chorus of lawmakers is probing price hikes taken by Mylan Pharmaceuticals and prompted Hillary Clinton to issue a wide-ranging plan to address prescription drug costs.

Although these episodes have mostly involved individual companies — if not specific drugs — the cumulative effect is starting to worry the pharmaceutical industry at large. For months, various industry executives and trade groups have attempted to isolate Valeant and Turing as outliers, while arguing that prices are justified to recoup legitimate costs that are needed to develop genuine medical advances.

Indeed, the Biotechnology Innovation Organization today launched a new television ad campaign, along with a web site, called Innovation Saves.

But so far, such messages are not being heard. Even before the EpiPen flare-up, a recent Gallup Poll found that, of 25 different business sectors, only the federal government is held in lower esteem by most Americans than the pharmaceutical industry. And the industry registered its worst showing in the 16 years that Gallup has tracked how the public perceives different sectors.

Saunders reiterated some of the same industry themes in his blog post by emphasizing that drug makers invest to innovate. And he complained that “outliers” have shifted attention away from the progress that the industry has made, although he did not name specific companies.

We should note that Allergan raised prices by 9.9 percent earlier this year on some of its best-selling medicines, including the Namenda XR Alzheimer’s pill and the Restasis immunosuppressant, according to Truven Health Analytics.

To what extent, his move will deflect further criticism or investigations remains to be seen. And whether other drug makers follow suit is also an open question, although Saunders has now placed pressure on the rest of the industry to at least make similar noises.

So far, investors reacted positively, sending Allergan up 2 percent.

“There is no joy on my part when a company finds itself in the public spotlight — the target of societal ire,” Saunders wrote. “I take comfort in reading about new treatments that improve and save lives. The public’s expectation is that we exist to heal and cure. It’s an expectation that mirrors our own.”

It is easy to get around a “social contract” when you’re doing late life cycle management. Not only don’t you have to raise the price but one well worn (but not worn out) strategy is to 1) reformulate your product into a more convenient dosage form 2) gradually draw down inventory of the old product 3) cannibalize the old product at the same time you introduce the “new and improved” product, 4) take advantage of your three year patent extension by jacking up the cost of the new product. Your insurance carrier can’t force a switch to the older cheaper product because it no longer exists. There will be the inevitable hew and cry over “bait and switch” and probably a few lawsuits, but they will take longer to settle than than the remaining patent life. Hope is still there; you can still get your old drug probably from a pharmacy in Kazakhstan.

Cynical yes, but the idea of “doing well by doing good” died with George Merck.

As I read the words of Mr Saunders about ‘the unwritten contract,’ I was reminded of some venerable words. These were indeed written down a good while ago and obeyed or not crystallize how the industry should look at itself. “We believe our first responsibility is to the doctors, nurses, and patients, to mothers and fathers, and all others who use our products and services.”

Granted, a ‘Credo’ is not a contract but it has a moral force. I assume the words are familiar but if not, search for Robert Wood Johnson, Credo, 1943.